Discretionary authority
Also known as: discretionary trading authorization
Discretionary authority is written permission from a customer allowing a financial professional to place trades in the customer's account without asking approval for each order. An account operating this way is called a discretionary account.
Discretionary authority gives a registered representative or investment adviser the power to make trading decisions in a client's account without contacting the client before every order. The client must grant this power in writing — usually through a trading authorization or power of attorney — before the professional exercises any discretion, and a principal of the firm must accept the account.
An order is discretionary if the professional chooses any of the three A's: the asset (which security), the action (buy or sell), or the amount (how many shares). If the client specifies all three — "buy 100 shares of XYZ" — the order is not discretionary, even if the representative picks the time or price at which to execute it. Time and price alone are not discretion, though such "market not held" orders are generally good only for that trading day.
Discretionary accounts carry extra supervision because the professional controls trading. Firms must review these accounts frequently for signs of abuse such as churning — excessive trading intended to generate commissions rather than benefit the client. Every discretionary order must be marked as such when entered.
Discretionary authority appears across the securities exams. The SIE exam tests the basics of discretionary accounts and the written-authorization requirement, the Series 63 exam covers discretion under state law including account features and customer agreements, and the Series 9 exam tests supervisory responsibilities over discretionary options activity.
Key takeaways
- Discretionary authority must be granted in writing before any discretion is exercised, and the account requires principal approval.
- An order is discretionary if the professional selects the asset, the action, or the amount — the three A's.
- Choosing only the time or price of execution is not discretion.
- Discretionary accounts require frequent supervisory review to detect churning and other abuses.
- The SIE, Series 63, and Series 9 exams all test discretionary account rules from different angles.